In a landmark decision having wide impact on the IBC regime, the Supreme Court on Friday allowed the appeal by Committee of Creditors in Essar Steel insolvency to set aside the order of the National Company Law Appellate Tribunal.
The judgment pronounced by Justice R F Nariman held that there was no equality between financial creditors and operational creditors. The Adjudicating Authority cannot substitute the commercial wisdom of the CoC. CoC arrives at a commercial decision taking into account the interests of both financial creditors and operational creditors. Financial Creditors enjoy primacy and the Adjudicating Authority cannot interfere with the commercial decisions of CoC.
The Adjudicating Authority has limited scope to review the decision of CoC.
"If the NCLT finds that legal parameters are not met, it can send back to CoC, but cannot tinker with the resolution plant", Justice Nariman, reading out the judgment, said.
The Court has also held that the time limit of 330 days for resolution to be not mandatory. It is open to the NCLT to extend the timeline if required.
"The equality principle cannot be stretched to treating unequals equally. That will destroy the very objective of the Insolvency and Bankruptcy Code (IBC) — to resolve stressed assets. Equitable treatment is to be accorded to each creditor depending upon the class to which it belongs: secured or unsecured, financial or operational," Justice Nariman stated in his 164-page judgment.
"If an 'equality-for-all' approach, recognising the rights of different classes of creditors as part of an insolvency resolution process is adopted, secured financial creditors will, in many cases, be incentivised to vote for liquidation rather than resolution… This would defeat the entire objective of the IBC," Justice Nariman observed.
The Court observed that financial creditors were capital-providers for companies, who in turn were able to purchase assets and provide a working capital to enable such companies to run their business operations. Operational creditors, on the other hand, were beneficiaries of amounts lent by financial creditors.
"So long as the provisions of the Code and the Regulations have been met, it is the commercial wisdom of the requisite majority of the CoC which is to negotiate and accept a resolution plan, which may involve differential payment to different classes of creditors, together with negotiating with a prospective resolution applicant for better or different terms which may also involve differences in distribution of amounts between different classes of creditors… All decisions by the CoC can be taken by a 51% majority vote," Justice Nariman noted.
The Supreme Court bench comprising of Justices R F Nariman, Surya Kant and Ramasubramanian had heard the batch of appeals challenging the NCLAT's decision in Essar Steel insolvency resolution, one of the most crucial insolvency matters of the country.
While approving ArcelorMittal's Rs 42,000 crore bid for the acquisition of Essar Steel, the NCLAT had held that financial and operational creditors must be treated at par under a resolution plan. It had ruled that the 'waterfall mechanism' under Section 53 of IBC is only applicable to distribution of proceeds from liquidation and not to resolution bids.
The Appellate Tribunal re-distributed the proceeds payable under the Resolution Plan of Arcelor Mittal India Ltd. (AMIL) for Essar Steel, so that all financial creditors (FC) (whether secured or unsecured) were paid 60.7% of their admitted claims and operational creditors (OCs), with claim amounts equal to or above Rs. 1 crore, were paid 60.26% of their admitted claims. OCs with admitted claim amounts under Rs. 1 crore were paid in full.
The NCLAT had further held that the financial creditors could not be classified on the basis of their security interest for the purpose of distribution of resolution proceeds.
Apart from the treatment of the claim of the OCs, the lenders of Essar viz. SBI, IDBI and ICICI were aggrieved that Standard Chartered Bank (SCB), with a much lower security interest value, was treated at par with the other lenders. Although Standard Chartered bank was a secured creditor, there was no security on the loan given out SCB.
ArcelorMittal was advised by the team led by Ms Ruby Singh Ahuja, Mr Vishal Gehrana, Mr Anupm Prakash and Mr Utkarsh Maria from Karanjawala & Co along with the team headed by Mr Sudhir Sharma, Mr Abhishek Swaroop, Mr Naman Bagga from L&L Partners.
Click here to read the detailed reports of the hearings in this case
Click Here To Download Judgment